5 October 2023

Sunak and Starmer

The bucket list.

By Robert Kilconner

We all have things which we would like to do if only we had the money and governments are no exception. Take HS2 for example, the massive infrastructure project designed to open up the North of England. A fine piece of levelling up you might think, but can we afford it? Some say that it is a must. Others that the pricing is dangerously out of control and that it must be cut back or scrapped. So the politicians of both parties are found fluttering around in the middle, letting “I dare not” wait upon “I would” like the poor cat in the adage.

We will leave the debate as to whether the railway is good value to those with expertise in the subject. There seem to be enough of them, God knows. Instead we will use the debate over HS2 as an illustration of the gap between what governments would like to do if they had the money and what they believe they can afford.

There are a lot of things politicians would like to do which would plainly make the UK a better and stronger country. Many of them are not affordable at the moment and so, perfectly correctly, they will not be promised in any election manifesto; that does not mean that they should be forgotten about altogether, however; instead they should be put on the backburner, placed on the list of things which should be done when and if the opportunity arises; kept as part of a broad vision of what an ideal system would be; added to a political bucket list to be kept in mind as circumstances change. As the election approaches voters should keep an eye on what would be on their list and how they fit in with the philosophy of the various parties. Not all of you will have made a list yet so here are some suggestions.

Let us start with the efficient employment of the workforce and in particular women who have children. Many of them find childcare a wholly fulfilling career but others would like to get back to work and delegate childcare to someone else if only they did not have to meet the costs out of taxed income; yes, yes, I am aware that the government has schemes for providing funded nursery places and would not wish to undermine these, but why is it not a general rule that where both parents are earning, the costs of their childcare are, where not met by the state, tax-deductible – and not just tax-deductible either. Also deductible for national insurance.

Of course it would cost money. High paid executives would be taking the deduction and lower paid childcare workers would be paying tax at a low rate. Still, in economic terms it would have the advantage of employing people in the roles to which they are most suited. Not a bad thing as we struggle in commercial competition with the Chinese

Then the whole area of capital gains taxation needs to be thought through. At the moment the rate on capital gains is lower than that on income which reflects the fact that the first is a tax on inflation, until recently compensated by an indexation allowance. With inflation at very low levels the system was seen as cumbersome and to an extent it was. On the other hand it was logical and fair and one day we will hopefully go back to it.

The taxation of capital gains is a topic shot through with anomalies. Another is the exemption for gains on a principal private residence. Why should these gains completely escape tax? There are I supposed two reasons. The first is that they largely represent inflation. That could be dealt with through an indexation allowance. The second goes back to the famous principle of taxation expressed by Colbert, finance minister to Louis XIV:

“the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

What could cause more hissing than for people to feel that they cannot move house because tax on the gain on the house they sell means that they cannot afford an equivalent house elsewhere? No, clearly that would be quite unacceptable; but what about a system where the gain on one house was simply rolled over into the base cost of the replacement. Then you could exchange houses as much as you liked and it would only be when cash was realised and removed from the system that tax was paid

Of course the private residence relief is politically sensitive and replacing it with a rollover could be hard to sell to the public. On the other hand it would enable one to remove stamp duty land tax which impedes the proper function of the market by taxing exchanges and making it unattractive for the older generation to move to smaller houses.

While we are talking about rollover relief, what about employing it more generally? The capital gains system might be improved by introducing rollovers wherever the proceeds of disposal are invested in an asset in a similar category. Gains realised on a stock exchange portfolio would then be rolled over to the extent that the proceeds were reinvested in stock exchange securities. Gains on art would be rolled over where proceeds were invested in more art. Clearly this would free up the working of the market but it would on the other hand give rather too much away if all the gains finally fell out of charge death. To compensate the free realisation on death could be replaced by a further rollover.

Then, to make this article more fashionable, we should perhaps finish up with the State Pension triple lock, under which the pension goes up each year by the greater of the increase in wages, inflation and 2 ½%. That is bizarre and foolish because the three drivers do not work in parallel with each other. For example in one year you might have a 3% increase in wages and no inflation; in the next year 3% inflation but no growth in wages. It is absurd that this would lead to an increase of 6%. The obvious way of dealing with the anomaly is to begin with a datum level in a particular year; the pension in later years would be calculated by applying the greater of the increase in earnings since then, or the increase in prices since then, or a compounded 2½%. That at least would be common sense and in line with the original thinking behind the triple lock. It would also be a pure saving for the Treasury. Both main parties are being coy about how they will deal with the triple lock pension. It is hoped that this is what they have in mind.

Tile photo: Paico Oficial on Unsplash